Market Analysis for Jan 23rd, 2004

It's been an interesting day largely because you've had some volatility in the indexes, but the volatility in and of itself hasn't yet produced serious technical damage to the charts. The reason why I choose looking at the downside is because the daily charts are looking as though the indices needs a rest, but the price action has yet to break any significant prior pivot lows to confirm what the daily charts are saying.

As we go from the daily to the hourly or the two-hour charts, we can fine-tune our assessment of where damage inflicted on the chart structure will actually give us some sell signals on a near-term basis. (Near-term providing more serious sell signals than the shorter-term micro basis.)

In the E-mini March S&P, we've traversed the range since Wednesday from 1149 to 1140. Yesterday's high -- Thursday's high -- was 1149.25, and we took a late-day swoon and hit 1140. Overnight, we crept back to about 1141 or so, and sure enough in the first hour it was back to the exactly the same high as yesterday, 1149.25.

But instead of breaking to the upside, which could have triggered a move to 1154-56, the S&P failed right where it had to break out to thrust higher and traversed the entire range again to a low of 1139.75. So it actually took out yesterday's low, after testing yesterday's high, but did yet follow through to the downside.

As we speak the price is 1142 in the E-mini March S&P. As long as that 1140 level holds, we can't claim any micro damage to the charts. In the event that the market tanks later and we close below 1139 , or so, then you have inflicted the micro damage to the chart. At that point, you have also positioned the price structure for continuation to the downside to test a much more significant level that is the key to the sell-signal on a near-term chart basis -- rather than a micro chart basis. That level would be 1132.75, which was the last significant upside pivot from Wednesday morning, January 21.

So this is a very interesting pattern that's shaped up. Until it breaks down, we have to view it as still constructive. On the other hand, if it breaks below 1139, especially late in the day, then I think we have ourselves the first crack in the uptrend, and it then will lead to a test of very important prior lows at 1132.75.

Looking at the QQQs, the Qs are in a similar type of pattern, although instead of testing their highs today, the Nasdaq indices failed to get through yesterday afternoon's highs and once again they're testing lower levels which have yet to break. So we don't have any sell signals there either.

But the salient feature of the Q chart is that you have a series of lower highs since Tuesday. Tuesday's first hour saw a high of 38.85. Then you stair-stepped, with each rally going to a lower high: 38.71, 38.69, 38.52 yesterday and 38.46 today. And the declines have been to lower lows except for the one today.

So the key level is 37.82, which was the low established after Microsoft's earnings came out at the end of the day yesterday. If it breaks 37.82 that will be our first indication of some damage to the micro chart structure.

However, unless and until 37.60 is taken out on the downside, which is a horizontal plateau that has supported every decline since January 9, no real damage will be done to the chart structure on a near-term basis.

If it is taken out, I think initially you'll go down to 36.80 and then perhaps to 36.40 after that. But at least we'll get some signals on a near-term basis that the damage has been done to the Qs under 37.60.

Unless and until that happens, though, we have to view this as a high-level consolidation, and perhaps, barring a breakdown, there'll be yet another upleg emerging from this sideways stair-step consolidation area.

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